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Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities

Anusha Chari

No 31143, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly open-end mutual funds and ETFs, accounts for nearly half of the external financing flows to emerging markets exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk-sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks such as tightening US dollar funding conditions relative to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns with implications for the role of macroprudential policy.

JEL-codes: F21 F32 F36 F65 G11 G15 G23 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk, nep-ifn and nep-opm
Note: AP IFM ME
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Published as Anusha Chari, 2023. "Global Risk, Non-Bank Financial Intermediation, and Emerging Market Vulnerabilities," Annual Review of Economics, vol 15(1).

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